The Emirates Economist

Economic analysis of events in the United Arab Emirates and the Gulf

Wednesday, October 31, 2007

In praise of sweatshops: Oldie but goodie

On the opponents of globalization:

When the movement gets what it wants, the effects are often startlingly malign. For example, could anything be worse than having children work in sweatshops? Alas, yes. In 1993, child workers in Bangladesh were found to be producing clothing for Wal-Mart, and Senator Tom Harkin proposed legislation banning imports from countries employing underage workers. The direct result was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets — and that a significant number were forced into prostitution.

The point is that third-world countries aren't poor because their export workers earn low wages; it's the other way around. Because the countries are poor, even what look to us like bad jobs at bad wages are almost always much better than the alternatives.

As many as 37 water bottling and distribution companies in Ajman have been ordered closed and several others warned by Ajman Municipality for hiking the price of bottled water and ignoring international hygiene standards. There are 64 such companies in the emirate.

Tuesday, October 30, 2007

Strikes threaten Dubai building boom

While laborers have long complained about working conditions in this Gulf city known for its avant-garde skyscrapers, luxury dwellings and archipelagoes of artificial islands, their recent action comes as contractors are struggling to find workers to complete their ambitious projects....The boom has been possible due to plentiful investment from oil-rich neighbors and armies of non-unionized south Asian workers whose fear of deportation, until recently, kept them from voicing discontent over low wages.

"The cost of living here has increased so much in the past two years that I cannot survive with my salary," said Rajesh Kumar, a 24-year-old worker from the south Indian state of Andhra Pradesh who earns $149 a month....A booming economy in India also means that many there no longer see the need to travel to Dubai and the Gulf, said Bernard Raj, managing director of the Dubai-based Keith International, which supplies Indian workers.

"In the past, when we go for recruitment of workers we were able to choose whomever we wanted. Now the turnout of candidates is very low," he said, estimating that at least 40 percent more workers were needed for the city's projects.

With the usual labor markets like India, Pakistan, Bangladesh and Sri Lanka drying up, labor companies are turning to less traditional places like Tibet and North Korea.

At the root of the problem is the Emirati Dirham's close connection to the U.S. dollar, which has seen it plummet in value, further decreasing laborers' already low salaries.

Kumar and his fellow workers said they asked their employer, Al Habtoor Engineering Enterprises, for a pay increase several times, but management was not willing to address the issue.

Permanent Committee for Monitoring the UAE's Image Abroad

The Cabinet has set up a taskforce to draft a law to regulate the relationship between domestic workers and their sponsors. The proposed law will ensure rights and duties of both sides are guaranteed, WAM reported....Dr Anwar Gargash UAE, Minster of State for Federal National Council Affairs, praised the Cabinet move. "We are fully aware in the UAE of the need to improve the situation of domestic workers and have been working systematically towards that goal," he told Gulf News yesterday. He described the decision as a major step.

Dr Gargash, who is also Chairman of the Permanent Committee for Monitoring the UAE's Image Abroad, added the move was an important milestone in protecting the rights of domestic workers in line with national and international standards....The UAE Human Rights Organisation has provided recommendations on a number of issues concerning the contract regulating the relationship between domestic helpers and their employers.

The contract should provide for a minimum wage because low salary is a major reason why a domestic helper absconds from her or his sponsor.

Minimum working hours and specific duties for each job.

System to transfer wages to banks regularly and on time.

Proper accommodation which ensures privacy is observed.

Specific daily working hours and weekly rest.

Equal annual leave as compared to other workers.

Providing a hotline to receive complaints from domestic workers against any abuses.

Saturday, October 27, 2007

A free zone for free thinking

There's something ironic about putting up walls in order to foster thought:

Its planners say men and women will study side by side in an enclave walled off from the rest of Saudi society, the country’s notorious religious police will be barred and all religious and ethnic groups will be welcome in a push for academic freedom and international collaboration sure to test the kingdom’s cultural and religious limits.

This undertaking is directly at odds with the kingdom’s religious establishment, which severely limits women’s rights and rejects coeducation and robust liberal inquiry as unthinkable.

For the new institution, the king has cut his own education ministry out the loop, hiring the state-owned oil giant Saudi Aramco to build the campus, create its curriculum and attract foreigners.

Supporters of what is to be called the King Abdullah University of Science and Technology, or Kaust, wonder whether the king is simply building another gated island to be dominated by foreigners, like the compounds for oil industry workers that have existed here for decades, or creating an institution that will have a real impact on Saudi society and the rest of the Arab world.

“There are two Saudi Arabias,” said Jamal Khashoggi, the editor of Al Watan, a newspaper. “The question is which Saudi Arabia will take over.”

The king has broken taboos, declaring that the Arabs have fallen critically behind much of the modern world in intellectual achievement and that his country depends too much on oil and not enough on creating wealth through innovation. ...Upon completion, the energy-efficient campus will house 20,000 faculty and staff members, students and their families. Social rules will be more relaxed, as they are in the compounds where foreign oil workers live; women will be allowed to drive, for example.

Don't try to fool Mother Google

:Many websites small and large receive over half of their visitors from Google search referrals. And without a sales team to sign advertising deals, most become AdSense affiliates, automatically connecting them with millions of advertisers worldwide....Indeed, a whole industry has spawned with the aim of helping website operators obtain the highest rankings for certain keywords in search engines, and milk the most out of their AdSense accounts.

But small changes to Google's algorithm that determines how high up in search results a site appears can foil any attempts to game the system in a heartbeat. The worst offenders who are caught trying to artificially boost their search ranking are given the "Google death penalty", whereby they're delisted from search results altogether.

So Google can delist if it wants to. Funny that it won't delist, for example, Nazi sites.

And, here's one for Markets in Everything:

Google is tight-lipped about changes to its algorithms, but bloggers have speculated it made the most recent change to crack down on the buying and selling of text links outside the Google AdSense network. Many website operators pay higher ranked sites to link to them, in order to trick Google's computers into thinking the site is more authoritative and thus securing it a higher ranking in search results.

Tuesday, October 23, 2007

In praise of globalization

An ideological fixation on inequality is especially perverse when it comes to less-developed nations. In these cases, we must be most concerned with increasing absolute standards of living across the income scale, and especially at the bottom. ... [The evidence is] globalisation is improving life for poorer workers around the world. Excellent! And that's about all we need know to get four-square behind expanding global trade.

Now, it is certainly interesting to explain the difference in rates of wage increase -- once we have firmly grasped that there is increase across the board. The IMF study finds that trade alone brings up the bottom and tends to reduce inequality. However, technology transfer and foreign investment, which tends to be tech-related, has bid up the price for certain kinds of highly skilled labour faster than it has for lower skilled labour, more than offsetting the equalising tendency of trade alone.

Friday, October 19, 2007

IMF appreciates the Dirham

Despite assertions by GCC central banks in the past that the dollar's weakness has little to do with domestic inflation in the region, the IMF said yesterday that the weakening dollar has added to inflationary pressures in the GCC countries which have pegged their currencies to the dollar....The IMF has called on the GCC governments to rationalise spending to the absorptive capacities of their respective economies to avoid any excessive demand-led overheating....The World Economic Outlook report said that the GCC states are expected to move towards independent monetary policies to fight inflation that will eventually have an impact on the status of the pegged currencies and the exchange rates. "Inflationary pressures are expected to persist in GCC countries as domestic demand expands in response to the increasing wealth, and the exchange rates should appreciate in response to these developments," the WEO said.

Rent controls: will they be softened?

Property analysts have cautiously welcomed proposals for a new rent cap scheme that would allow landlords to appeal for rents to be adjusted in line with market rates.

An official at the Real Estate Regulatory Agency (Rera) yesterday told Gulf News that landlords who feel the cap is keeping rents below market rates should be given the opportunity to hike prices above the restriction in line with a benchmark recommended by Rera....Cases have emerged in new shopping malls and commercial complexes where a developer will offer discounted rents during the first year of operation as an incentive to attract tenants to the development, she said. "Landlords who signed such tenancies cannot currently apply for any increase in rents to bring them in line with market rates," she said.

According to Rera, an index of rental prices will be formed to help the rental committee decide the outcome of rental disputes.

The logic behind the rent cap seems exemplary. Landlords in Dubai in many cases had been able to exploit conditions in which rapid demand was overwhelming supply, to the point where delaying the release of units promised even more money in the bank.

Naturally, those desperate for affordable accommodation were delighted by the cap's introduction, since we've all been hit in the pocket, whether it's for school fees, food or transport. The cost of living has become a source of considerable angst for households, and a factor also for businesses considering whether to locate here.

But controls are an imperfect approach, which is why reviewing the issue is timely. If units are not reaching the market because landlords are withholding them on grounds of inadequate return, then the situation is only aggravated by artificial intervention. That's the law of unintended consequences in action.

There's a contradiction in logic in the editorial - how can removing the rent control lead to an expansion in the number of units available if you've said in the first paragraph that the "exemplary" logic of the rent controls is that units were being withheld absent the controls?

What we know is that, prior to rent control, demand for housing grew very rapidly relative to supply and rents jumped up considerably as a result. And the trend of rapidly growing rents is likely to continue as it takes time for supply of housing to catch up to ongoing growth in housing demand. This is entirely consistent with a competitive (non-monopoly) market - which is one where no one supplier has an incentive to withhold product to drive up the market price for all.

Rather than rent control RERA should be asking whether there are elements of monopoly in the market, and attacking those directly. We have some evidence, though, that the market is relatively competitive because economic theory tells us that rent control will exacerbate shortages, and this appears to be exactly what has happened.

In short, rent control has had the opposite of the intended effect: fewer units are available, not more. The closer the controlled price is to the market, the faster rents will return to pre-existing levels because suppliers will be in a greater rush to bring units on line. (Footnote: Underlying land values are another matter. If they are increasing (and they may well be given the value of living in Dubai) this will be reflected in increased rents.)

Headline: "Water consumption to be cut in half"

Majid Al Mansouri, Secretary general of the Environment Agency Abu Dhabi, said Abu Dhabi Government will reduce water consumption rate from 550 gallons per head per day to 250 gallons per head over the next five years.

Let's examine the price charged for tap water. It's priced below its cost, and hence the incentive to economize on its use is too weak. In some areas water usage is not metered, or if it is metered it is not billed or bills are forgiven.

Wednesday, October 10, 2007

Comment of the day: October 10, 2007

rosh said... Agree with all of BuJ's views - he's hit the nail on its sweetest spot!

As someone who was born/raised in a single nation for the first 25 years of his life (am 31 today), it almost incomprehensible, not having the option to call this place as a *home* in its truest sense. I cannot express how unsettling it's to grow up thinking this way.

All my growing up, teenage and most adult memoirs are held in this tiny nation. My parents have been in the UAE since 1969, they are both retired, and continue to live in UAE. Today, I live in Manhattan - but UAE is my home, hometown, whatever you chose to call it. There is not a single day, I don't think, debate or check upon UAE. It's a part of me that I can't get rid off, even if I wanted to (believe me, I've tried : )

Personally, I couldn't care less of rights/benefits enjoyed by citizenry. The only right I seek is the right/option to live, work and make a home in a place where I was born and raised. Don't care for naturalization - a resident process is most preferred, so I can switch or ditch a job without the fear of "visa cancellation".

Beyond all the glam sham in Dubai, UAE is a beautiful country with a simple, honest and giving soul. I connect with it, like no other.

Tuesday, October 09, 2007

World Bank and the poorer Arab economies

[World Bank President] Mr. Zoellick says he plans to focus more on the Arab world and encourage the kinds of reformers he met [as US trade representative] when negotiating free-trade pacts with Oman, Bahrain and Morocco and pushing for stronger trade ties among Egypt, Israel and Jordan. Boosting employment is a huge challenge in the Middle East, where the birth rate is high and economic growth isn't. Mr. Zoellick believes that focusing on labor-intensive export industries, like textiles, could help. His theory: The bank can help "create societal cohesion by giving people the chance to have opportunity and development."

To come up with specifics, Mr. Zoellick has consulted his onetime economics professor at Swarthmore, Howard Pack, now at the University of Pennsylvania's Wharton School. Mr. Pack says trade liberalization won't work unless other changes are made too, including building better ports and roads and making customs systems less corrupt. Education and social mores are critical, too. When Asian nations in the 1970s and 1980s jumped into textiles and manufacturing, they began with workers trained in manufacturing and women willing to work outside the home. That is often not the case in Arab nations.

If you look at Egypt, one of the challenges will be, can people create jobs and opportunity and have a sense that the government is meeting social needs? [If not], others will try to meet those needs, as you have seen elsewhere in the Arab world....The U.S. Congress had created something called QIZs, qualified industrial zones, which Jordan used to great effect. What they permitted was duty-free access to the United States for goods produced in these zones. But the country had to work out with Israel a certain percentage of Israeli investment, and that was to be negotiated by the countries.

Egypt had held off, and so one of the last things I did [as U.S. trade representative] in 2004 was to participate in an event in Cairo with [Israel's Ehud] Olmert, who was then the trade minister, and [Rashid Mohamed] Rashid, who was commerce minister, to create a number of these QIZs.

What stuck in my mind is that as I was leaving for the airport, there were reports of two demonstrations. One was of about 300 intellectuals that were protesting Egypt's doing an agreement with Israel. The other was thousands of workers who were protesting that there weren't more QIZs, because they wanted the jobs.

Monday, October 08, 2007

Insight from Buj

Imagine having 50% of the country's population replaced every 6 yrs? That's madness. You bring in new diseases, you bring in totally new people with possibly worse driving etiquette than the status quo, you erode the already eroding Arabic language, etc, etc.

Why not work on who we have and try to KEEP them here. I want to keep every steel-fixer, hod-carrier, plumber, taxi driver, company director, etc.

Let's educate them. Let's teach the principle of lane discipline. Let's teach the principle that bad driving can be lethal. Let's teach them to live with each other rather than in parallel but separate worlds. The list goes on.

To conclude I think our problems in the UAE are because of the volatile situation of people migration. If we cool it down and encourage the right people to stay (rather than the wrong people to leave) then we'd be going forward :)

Sunday, October 07, 2007

Revaluation of the dirham?

Predicting a 30 per cent possibility for an imminent revaluation of the UAE dirham, monetary experts said the UAE currency needed a significant appreciation of 35 per cent against dollar to regain its intrinsic strength in relation to other currencies.

Gary Dugan, Chief Investment Officer, Global Wealth Management, Merrill Lynch, told Khaleej Times that the GCC currencies needed to appreciate by around 35 per cent to reduce excessive savings. “In the shorter term, we expect the UAE or Qatar will move to peg versus a basket of currencies this year.”

As the article notes the UAE central bank has insisted it is not going revalue or more to a peg.

Residency cap?

The GCC labour ministers' council will also explore the possibility of enacting a law for domestic helpers and creating a model system for local market data base, according to official news agency WAM.

UAE Minister of Labour Dr Ali Bin Abdullah Al Ka'abi said the meeting will discuss what is called (3+3 law) which allows unskilled workforce to stay in the country for three years which can be renewed for another three years...."To enforce a residency cap on unskilled workers of a maximum of six years will contribute to solving the problems associated with the influx of foreign workers and protect our identity," said Al Ka'abi, adding that he is hopeful that the proposal will be approved at the meeting.

The number of foreign workers can be controlled by limiting the number of worker visas. It's not clear why we would want to churn workers. Firms, I would think, would like to get something out of the investment they've made in familiarizing the workers with the job. And if some of the workers are drivers - say of company trucks or heavy equipment - isn't it to our benefit to keep the ones who have become familiar with driving here?

If at first you don't succeed...

... try, try again.

It's an ongoing game in Abu Dhabi between the rent control authority and the building owners. Here's another episode in the saga from Gulf News

"Changing the business from residential building into hotel apartments is not a legal ground to evict tenants," said Mohammad Rashid Al Hameli, chairman of the Abu Dhabi Rental Disputes Resolution Committee.

Al Hameli said under the law, landlords cannot ask tenants to vacate unless in specific cases, including approved demolishing, for personal use, tenant's failure to pay the rent, subletting the property without the approval of the landlord or violating public norms....Al Hameli said tenants should not obey any eviction order issued by landlords or any authority unless the order is approved by the Rental Disputes Resolution Committee.

The take away message to investors: If you build anything new call it a hotel, not a residence.

Saturday, October 06, 2007

Pro-market policies are left wing

Labour-market flexibility, deregulation of the service industry, pension reforms and greater competition in university funding is not anti-equality. Such reforms shift financing from taxpayers to the users themselves and, as such, tend to eliminate rents. They tend to increase productivity by basing rewards on merit rather than on being an insider. They tend to open up opportunities for younger workers who are not yet well-connected. Pursuing pro-market reforms does not imply facing a trade-off between efficiency and social justice. In this sense, pro-market policies are “left wing”, if that means reducing the economic privileges enjoyed by “insiders”.

More than a third of Italian men over the age of 30 live at home with their parents, a phenomenon blamed on sky-high apartment rents and bleak job prospects as much as a liking for mamma's cooking.

Economy Minister Tommaso Padoa-Schioppa offered to come to the rescue with a 1,000 euro ($1,411) tax break for 20- and 30-something Italians who rent. He said the move was aimed at "bamboccioni," which evokes images of clumsy, overgrown male babies. "We must send those we call 'big babies' out of the house," the minister told a Senate hearing on the 2008 draft budget.

Friday, October 05, 2007

Autocrats, selectorates and economic growth

Autocrats typically rely on key groups to stay in power. This could be a party structure or the military or a close group of allies. Concerted action by this group may, in principle, depose the leader. Following recent work, we refer to this group as the “selectorate” as opposed to the “electorate” in democracies.

In the absence of elections, it is important to focus on what incentive this group has to support leaders that foster good policies. As citizens, this group will tend to benefit from economic prosperity. But, equally they are likely to enjoy some trappings of power by having allied themselves with the leader. If deposing the leader threatens these benefits, they may be reluctant to do so. This leads us to predict that secure selectorates will tend to create performance-related incentives for their leaders and would be willing to remove the leader from office if he does not perform well. Selectorates whose own hold on power is closely tied to a specific leader are willing to preside over bad policy.

Recall how the UAE's founding father came to power in Abu Dhabi - the family deposed his brother because of his economic outlook. Comparisons between Gulf States on this score would, I suspect, be illuminating.

Thursday, October 04, 2007

The UAE welfare state

All 800,000 Emirati citizens get free education and health care, and subsidized utilities. Emirati men can claim free land and no-interest loans to build homes. Other benefits include a $19,000 payment toward wedding costs.

The handouts, based on traditions of royal patronage dating back centuries to Bedouin society, now discourage citizens from working, academics say. Expatriates outnumber Emiratis and dominate fields such as banking, law and technology. The quandary for Sheikh Mohammed is how to reduce the culture of dependence without alienating his people.

``The relationship between work and income is broken,'' says Kenneth Wilson, Dubai-based director of the Economic and Policy Research Unit at Zayed University, a school for Emirati women that opened in 1998. ``That's unlikely to change until the government starts trying to give incentives to work in the private or corporate sector.''

The phrase "culture of dependency" bothers me. Suppose I inherited stock and could live very comfortably off of the dividends if I chose. Would you say I was dependent on the stock? And does it create an incentive for me to stop working? No; Bill Gates is still working plenty hard.

The UAE is a very rich country and it is only natural that the wealth owned by the government/rulers is shared with the citizens. Where economists begin to worry is when the size of the transfers creates adverse incentives. For example, suppose you get more from the government if you earn less. This cuts your incentive to work. Or suppose underpricing of utilities causes you to waste water and electricity -- there are more efficient ways to make transfers. Or suppose that government jobs are require little effort and pay much more than the private sector -- where's the incentive to choose the private sector rather than engaging in rent-seeking activities (wasta) to get a government job? Or suppose you are guaranteed a government job as long as you have any college degree -- where is the incentive to excel in college?

It's not the size of the transfers. It's their design.

The Bloomberg article goes on to suggest that the transfers buy political allegiance. If that is true then the trick to solving the Emiratization problem will be to reform the welfare system without cutting the benefits to most citizens.

Wednesday, October 03, 2007

GCC Monetary Union delay likely

The Gulf central bank governors, who met in Saudi Arabia in early September, announced that the 2010 target is not realistic, but said that they would work towards an early deadline.

Suwaidi's statement is the first by a Gulf central bank governor that has admitted that the currency union project could be behind schedule by more than five years.

The UAE Central Bank governor said that the GCC states are behind in achieving common currency parameters such as free flow of capital and people across borders, compatible laws in land and property ownership and tax laws. "Allowing corporations to establish branches, expand their businesses, buy and hold property and flows of people, these are beyond the control of central banks," he said....Meanwhile, the UAE Central Bank governor said monetary policy has very little to do with inflation control in the UAE. ...

"I think it is fiscal policy planning, expenditure by the government that has to be phased in a way that will have housing units before you have the influx of people who will do the developmental projects," he said.

It's both. Of course when you've pegged your currency to the dollar monetary policy is straightforward.

Tuesday, October 02, 2007

Sweet!

With prices for corn syrup and other ketchup ingredients going up faster than Heinz can raise its own prices, the Pittsburgh-based condiment king is overhauling its breeding operations to help compensate. Heinz is developing sweeter tomatoes that could cut down on its need for corn syrup, as well as varieties that resist disease, stay fresh longer and produce a thicker consistency. "The new seed work is all about creating the perfect tomato," says Mr. Ozminkowski, the company's manager of agriculture research.

The ethanol industry's consumption of corn is just one factor driving up its price. Rising global demand for meat is also boosting prices, since corn is a key ingredient of animal feed. ...Heinz faces risks any time it changes the tomatoes in its ketchup, which could affect the balance of flavors customers are used to. ... Heinz officials say their ketchup undergoes rigorous testing before being introduced to the marketplace and that consumers won't be able to detect any difference as the company gradually uses sweeter tomatoes and less corn syrup in its ketchup.